Both Mitt and Barack spoke about Social Security (SS) in their
debate. For political reasons, they took the same approach. They
indicated their continuing support for this busted program. They
agreed that some “tweeks” might be necessary, but there would be
no fundamental changes to America’s largest entitlement program.

I wish that one or the other of the candidates had spoken the
truth about SS. The fact is it is a terrible program for the vast
majority of workers who are forced to contribute to it in order
to keep this dog alive.

Fortunately, the
Congressional Budget Office has provided the information
necessary to look at SS and evaluate how various income groups
will fare over their lifetimes. The bottom line is as ugly as it
can get. The fact is that SS is stiffing 80% of American workers.

For people born in the 1940s or later who have
household earnings in the second quintile or above,
the present value of taxes will
be, on average, more than the present value of scheduled
benefits.

Got that lovers of SS? 80% of the people who
contribute to SS get less than what they paid in. Only the bottom
20% of income earners have a chance of breaking even.

The CBO provided a chart that describes the consequences to
various income groups. I found the CBO presentation a bit
confusing and also misleading. The following is the original
chart from the CBO, after that is my stripped down version.

I) – My chart eliminates all of the information
marked “Scheduled Payments” (SP). This term
refers to a theoretical number that an individual is accruing
according to a schedule at SS. But that number is not going to be
paid to a substantial number of workers. The law says so. From the
CBO report:

Taxes are projected to be insufficient to pay for
scheduled benefits

If you’re under 55, nix to any thoughts you might have on that
statement from SS about your SP. All that information in dark
blue is just smoke. (I don’t think they even send SPs anymore)

II) I eliminated the info for those born after
1940. It’s not significant.

My revised chart allows most people working in America today to
evaluate what his or her results from SS will be. Consider the
following when trying to find where you fit in:

-The data is a ratio of the NPV of contributions one will make
versus the NPV of the benefits one will receive. 100 is
breakeven. If you are below the 100 line, your a loser.

-The results are presented in vertical bars. The bars represent a
range of outcomes. The key variables are how long you worked, and
how long you will get benefits before you die. It is 80% certain
that you fit into this range of outcomes. If your not sure about
those variables, assume you are at the midpoint of the
appropriate range.

-No information is provided for the second and fourth quintile of
income earners. The language the CBO uses (above) confirms that
the second quartile also suffers from negative net returns from
SS. Those in the fourth quartile are deeply in the red.

-The following is the information on annual income by quintile.
The first line is the CBO numbers from 2009, the second line is
my updated numbers for today (I think I’m pretty close with these
estimates)

Did you find yourself in this chart? Are you surprised by the
results? My conclusions:

If you are on the bottom of the income scale today, and you
expect to remain at the bottom for the rest of your working life,
then you will be happy with the results that SS will deliver to
you. Only a small portion of those in the lowest income bracket
will face a negative return on their SS contributions. If you are
on the bottom rung, you can expect, on average, to get about
$1.25 back for every dollar you (and your employer) have kicked
into the rat hole of SS.

If you are not now at the bottom, and/or you don’t expect to be
in that position for the rest of your working life, then SS is a
very bad deal for you. Fully 80% of all workers will see a
negative return on the money they are forced to put into SS.

I don’t get it. Both political parties
want to keep SS as it is, or raise taxes further to “strengthen”
it. I believe that if there were a poll of workers asking if they
were pro or con on SS, the results would conclude that a majority
wants the program to continue. But 80% are getting
screwed.

12.4% of an individual’s compensation goes out the door to SS. If
this burden were eliminated, the economy would thrive.
Unemployment would drop as the extra take-home pay works its way
through the economy. As the economy expands, tax receipts would
rise.

Alas, there is no possibility to eliminate SS. The committed
costs for the next 20 years are impossible to reverse at this
point. This beast can’t be killed any longer.

There might be an alternative; an opt-out for younger workers. If
there were an opt-out, I think that many workers would accept the
deal. If there were a lot of folks who did not want to “pay to
lose” with SS it would result in a huge hole. That hole would
have to be filled. Some payroll tax would have to be applied to
those who opt out. I have not seen any numbers on this approach
(Hello – JCT), I estimate that a 2% tax on opt-outs
would be required to keep SS afloat.

I’m curious what people think about an opt-out. If you respond,
keep in mind that most of you are getting about 50 cents on the
dollar for what you are now putting in. My question:

If you opt-out, you will get a net 10% pay raise for the rest of
your life. Your income will go up by 12.2%, but you will get hit
with a 2% tax that goes out the door. You will not get SS
benefits when you retire.

If there were an opt-out, there would be consequences:

*The size of the government’s role in society and the economy
would decline over time.

*The opt-out would result in a near-term stimulus for the economy
as forced savings is converted into take-home pay and
consumption.

*As SS has a source of revenue and no long-term liability (the 2%
tax/no future benefits) the actuarial solvency of SS would remain
about the same.

*Opt-outers would have to be much more diligent about their
savings and planning for retirement.

The risk of an opt-out is that 25-30 years from now those who did
opt-out end up with no savings and become a burden to society.
Depending on the numbers, this could be a real problem. I say
“could” as it is impossible to predict what will happen.

I can, however, say with certainty that the existing SS “plan”
insures that there will be a major crisis with SS and the economy
in less than twenty-years. That outcome is written in stone. It
would be worth our while to consider the alternatives. I doubt we
will be given a chance for any real alternatives from either Mitt
or Barack. Their plans guarantee that we will hit an iceberg.